England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (ADMINISTRATIVE APPEALS CHAMBER)
Judge Howell QC and Judge Jacobs
[2010]UKUT 234 (AAC) and [2010] UKUT 90 (AAC)

		Royal Courts of Justice Strand, London, WC2A 2LL
		13/10/2011

Lord Justice Thomas:

1. One-off lump sum payments were made by local authorities to the two appellants who were their employees in order to settle claims for breaches of equal pay legislation over several years. The issue in these appeals is whether the payments have to be brought into account for the purposes of a retrospective calculation of the appellants' past entitlement to means tested benefits - housing benefits and income-based jobseeker's allowance. If the payments constitute "income", then the payments have to be brought into account and a repayment made of some of the benefits received. If they are "capital", they do not. It was common ground before us that there is no material difference between the legislative scheme for housing benefit and that for jobseeker's allowance.

Background

(i) Equal pay claims

2. Over many years the local authorities who employed the appellants failed to comply with their obligations under the Equal Pay Act 1970 for prolonged periods of time. The errors came to light as a result of decisions of the courts in 2007 and 2008 which identified a systemic problem with the way in which the equal pay legislation had been applied, principally for part-time workers.
3. As a result of action taken by Trades Unions, many local authorities entered into settlements of claims under the Equal Pay Act 1970, the Sex Discrimination Act 1975 and potential other employment and common law causes of action. The settlements resulted in single one-off lump sum payments, broadly calculated by reference to the pay that the employee would have earned over a given period had the local authority not practised discrimination.

(ii) Miss Minter

4. Miss Minter had been a part-time employee at Hull City Council since 2003, working as a clerical assistant in the occupational therapy department. Because of the low wages she was being paid, she was claiming and receiving means tested housing benefit and council tax benefits.
5. In March 2008 Miss Minter accepted a cash payment of £4,768.55 offered by Hull City Council through a scheme effected through the co-operation of Unison with the involvement of ACAS. In the settlement agreement entered into on 25 March 2008 the sum was acknowledged to have been paid in full and final settlement of a number of claims which included:

(a) equal pay (including any claim under the Equal Pay Act 1970 or the Equal Treatment Directive),

(b) any claim under the Sex Discrimination Act 1975 (including but not limited to any claim for compensation for injury to feelings),

(c) breach of contract (including any claim alleged to be payable under an equality clause),

(d) unlawful deduction of wages (including any sum alleged to be payable under an equality clause),

(e) claims brought under any of the preceding causes of action that arose in the period January 2007 to September 2009 relating to payment protection of income levels applied to comparative groups, and

(f) claims for loss of pension rights in relation to the compensation period.

It is clear from the settlement agreement and other information put before us that the sums paid to Miss Minter were calculated by the Council with reference to Miss Minter's past income.

6. Very properly, she disclosed the payment to the benefit department of the Council. On 22 August 2008 the benefit department retrospectively re-assessed Miss Minter's benefit entitlement in the light of the payment she had received, applying the Housing Benefit Regulations 2006 in that assessment. They sought repayment from her of £545.11 in respect of overpayment of housing benefits.
7. The claimant appealed to a First Tier Tribunal sitting in Hull; the judge of that Tribunal held that the payment was income, but it did not have to be brought into account as it was not recoverable under the regulations on an issue that is not before this court. On 6 July 2010, Judge PL Howell QC, sitting in the Upper Tribunal (Administrative Appeals Chamber), allowed the Council's appeal; he affirmed the decision that the payment was income, but held that the overpayment was recoverable ([2010]UKUT 234 (AAC)). Miss Minter appeals by permission of the single Lord Justice on the issue as to whether the payment was income.
8. It was accepted before us that if the payment was properly classified as income or arrears of income, Regulation 79(6) of the Housing Benefit Regulations had the effect of attributing the income to a period in the past. The details of the way in which the income was attributed were far from clear, but it was not necessary for this court to be concerned with that, as the appeal was solely on the issue of whether the payments were to be treated as capital or income.

(iii) Miss Potter

9. Miss Potter worked part time for Wolverhampton County Council; she applied in 2007 for Jobseeker's Allowance. She was offered a payment of £7,216.36 in December 2007 in settlement of similar equal pay claims. The Council paid at that time 10% of this amount; it was paid in part payment either of the settlement, if she accepted the offer, or a payment on account if she did not settle and pursued her claim before an Employment Tribunal. The Council calculated her claim by reference to the difference between her income and an average comparator group.
10. She did not accept the settlement offer; if her claim is to be pursued, it will have to be pursued before an Employment Tribunal. The Department for Work and Pensions assessed the sum of £721.74 as income for the purposes of the Jobseeker's Allowance Regulations 1996.
11. On 28 August 2008, the First Tier Tribunal decided that the sum was not to be treated as income under Regulation 98 of the Jobseeker's Allowance Regulations. On appeal, Judge Jacobs, sitting in the Upper Tribunal (Administrative Appeals Chamber) allowed the Department's appeal on 25 March 2010 and held that the payment was income ([2010] UKUT 90 (AAC)). Miss Potter appeals by permission of the single Lord Justice.

(iv) The argument of the employees

12. Mr David Forsdick instructed by the Child Poverty Action Group appeared for both appellants. In essence his clearly presented contention was that as the legislation did not define what payments were to be classified as "income" or "capital", the words were to be given their ordinary meaning in the statutory scheme for housing benefit and jobseeker's allowance as sums paid to meet needs on a weekly basis calculated by reference to benefits in that week. The relevant Regulations only applied once the payment had been categorised as income or capital. The substantial one-off payments made to each of the employees viewed in this way did not have the characteristics of income and were not therefore income in the hands of the employees.

The Housing Benefit Regulations

13. Housing benefit is an income related benefit payable under a prescribed scheme under s.123 of the Social Security Contributions and Benefits Act 1992. Under s.136 of the Act, eligibility for benefit is tied to income; it is payable if a person has no income or the income is below a defined amount. Under s.134, a person is not eligible if his capital exceeds a prescribed amount.
14. The details of the scheme are set out in the Housing Benefit Regulations 2006 (2006 SI No 216) made under that Act. In the scheme of the Regulations, the definition and calculation of income and capital is set out in Part 6, entitled "Income and Capital". That Part is divided into a number of Sections, numbered a-f.

i) Within Section a, entitled "income", Regulation 27 provides that income is to be calculated on a weekly basis. Under Regulation 29 where income comprises earnings from employment it is to be calculated by a specified average in accordance with the calculation method set out in Section b entitled "employed earners" and in particular Regulation 35 which provides:

"Regulation 35. – Earnings of employed earners

(1) Subject to paragraph (2), "earnings" means in the case of employment as an employed earner, any remuneration or profit derived from that employment and includes –

(a) any bonus or commission;

(b) any payment in lieu of remuneration except any periodic sum paid to a claimant on account of the termination of his employment by reason of redundancy;

(c) any payment in lieu of notice of any lump sum payment intended as compensation for the loss of employment but only in so far as it represents loss of income;"

ii) There is then a general sweep up provision for other income in Section d of the regulations. Regulation 41 is entitled "Capital Treated as income"; paragraph (3) provides:

"Any earnings to the extent that they are not a payment of income shall be treated as income."

iii) Rules for the calculation of capital are set out in Section e, entitled "Capital" - Regulations 43 and following. Regulation 44 provides that the whole of the capital, calculated in accordance with the regulations is to be brought into account.

The Jobseeker's Allowance Regulations

15. Jobseeker's Allowance is a scheme prescribed under the Jobseekers Act 1995; details are set out in the Jobseekers Allowance Regulations 1996 (1996 SI No 207). These regulations are very similar to the Housing Benefit Regulations not only in the distinction drawn between capital and income but also in that income and capital are not defined. Part VIII of these Regulations provides for the calculation of income and capital.

i) Regulation 98, entitled "Earnings of employed earners", is very similar to Regulation 35 of the Housing Benefit Regulations, but it does not have an equivalent to Regulation 35(1)(b) (payment in lieu of remuneration). It provides:

(1) Subject to paragraphs (2) and (3), "earnings" means in the case of employment as an employed earner, any remuneration or profit derived from that employment and includes:

....

(b) any compensation payment

...

(3) In this regulation "compensation payment" means any payment made in respect of the termination of employment other than..

(a)–(d)

ii) Regulation 104(4) is identical to Regulation 41(3) of the Housing Benefit Regulations.

The decisions of the Upper Tribunal

16. Judge Howell QC, who heard the appeal in respect of Miss Minter, considered that the question as to whether the payment was income or capital was clear on well established authority. It was properly characterised as compensation for past loss of earnings arising out of unequal treatment in the matter of pay. It was therefore income because it was earnings within Regulation 35(1) - "any remuneration or profit derived from that employment" including "any payment in lieu of remuneration".
17. Judge Jacobs, who heard the appeal in respect of Miss Potter, held that the First Tier Tribunal was correct in deciding that it was not a compensation payment under Regulation 98, but the First Tier Tribunal judge should have gone on to decide that it was income rather than capital. On an analysis of the characteristics of the payment and the application of the case law, the payment was earnings as the payment was for the loss of past income. It was therefore income.

The characterisation of the payments

(i) The approach

18. The issue as to whether the payments are income or capital has to be determined in the context of social security legislation and the particular legislative scheme in issue.
19. The first task is to determine the true characteristics of the payment in the hands of the recipient, looking at the issue in the context of the two legislative schemes in issue in this appeal: see R v National Insurance Commissioner ex parte Stratton [1979] ICR 209. This court had to consider in that case whether a redundancy payment was income or capital for the purposes of unemployment benefit. Lord Denning MR made clear that the correct approach was to examine the "true characteristic" of the payment; a redundancy payment was made because a man was regarded as having an accrued right in his job; if he was deprived of his job he should receive a capital payment to compensate him for the loss of it; it was not a payment for loss of future income.
20. There are many cases which are referred to in the judgments of Judge Howell and Judge Jacobs where Stratton has been applied in determining the true characteristic of the payment in the hands of the recipient. One example should suffice - R(SB) 21/86, a decision of Commissioner Rice in respect of compensation for unfair dismissal. Applying Stratton the Commissioner held that the compensation fell within the term "any payment in lieu of notice or remuneration" within the definition of earnings in the then supplementary benefit regulations, as its true characteristic was compensation for future income or remuneration that would otherwise have been payable had the employment not been terminated.
21. In determining the true characteristic of the payment in the hands of the recipient for the purposes of the legislative scheme, the label that the parties attach to it is irrelevant. That is because the parties to a private agreement cannot determine by the label placed on it by them how it is to be treated for the purpose of social security legislation. For that purpose in the public interest, it is its true characteristic that is alone relevant.
22. If the sum is payable by way of a settlement of a claim or claims, it does not matter in determining its true characteristic whether it is a lump sum or a series of periodic payments. It is only necessary to examine why the compensation is being paid, not whether the manner of payment is by way of a single lump sum or a series of payments, as the method of settlement is again irrelevant.
23. Nor does the size of the payment in contrast to the weekly or monthly wages of an employee matter. The size of the payment in the hands of the recipient cannot alter its true characteristics. If, for example, an employer had through a computer error underpaid an employee the wages due by a substantial amount over a period, the underpayment remains income even if paid in a single lump sum of whatever its size. Nor can the mere fact that the sum may have accumulated over a prolonged period make a difference. Neither of these factors can determine the true characteristics of the payment.

(ii) The payment to Miss Minter

24. Thus in determining the true characteristics of the payment made to Miss Minter, it is, in my view, clear from the underlying dispute and terms of the settlement agreement entered into by her that the payment was compensation for the lower wages which she had been paid over a period of time because of breaches of the Equal Pay Act 1970, the equality clause applied to her contract by that Act and other legislation relating to unequal pay. The actual sum had been calculated using average comparators over the period when she had been paid less than she should have been paid, if the Council had applied the legislative provisions correctly.
25. A number of different arguments were advanced by Mr Forsdick as to why the settlement could not be viewed in this obvious way. He referred to difficulties in assessing the equivalent work, the problems with work of equal value tests, the possibility of claims for injury to feelings and damages for contravention of the legislation and the question of interest in the amount. He relied on the fact that the agreement had been reached though the Trades Union and that in the relevant period no one would have said that Miss Minter had an identifiable claim to a certain amount of additional income enforceable under her contract of employment. However, it is clear from the underlying dispute and terms of the settlement agreement that what was being settled was nothing more or less than her claim for underpayment of her wages because of a failure to observe equal pay legislation. Its true characteristic was therefore clearly compensation for past lost income.
26. That being the true characteristic of the payment to Miss Minter, the question then arises as to whether it is income or capital within the relevant provisions of the Regulations which I have set out above. I do not think it necessary to refer at any length to the decision in Morrell v Secretary of State for Work and Pensions [2003] EWCA Civ 526 where Richards J (as he then was) gave the leading judgment in this court in an appeal in relation to the question of whether payments received by a claimant were to be treated as income for the purposes of the income support legislation. He observed that, as the legislation did not define income, it should be given its ordinary and natural meaning (paragraph 31). In the present case, once the true characteristic of the payment is identified, both statutory schemes are clear as to the categorisation of the payment as income as opposed to capital.
27. Under the Housing Benefit Regulations, as the payment was a payment of what should have been paid as wages, it fell within Regulation 35. It was within the term "remuneration" in the opening words of paragraph (1) as it was derived from Miss Minter's employment with the Council as it was solely referable to what she should have been paid during her employment. If not, it was "payment in lieu of remuneration" within (1)(b) as it was a payment for what she should properly have been paid.
28. If it was not a payment of income within Regulation 35, then it must have been earnings within Regulation 41(3). This was not a point argued before the Upper Tribunal; nor was it raised in the skeleton arguments. We were told that the relevance of the Regulation was spotted immediately prior to this hearing; it was therefore very properly raised by Mr Forsdick in his oral argument.
29. It was common ground that "earnings" in Regulation 41 has the same meaning as in Regulation 35. Earnings thus encompass any remuneration or profit derived from employment including payment in lieu of remuneration. As a matter of ordinary language, then the payment was, for the reasons I have given, remuneration or profit derived from the employment or payment in lieu of such remuneration. We were referred by Mr Forsdick to Hochstauser v Mayes [1959] Ch D 22 where this court decided by a majority that a scheme to assist employees of a company when moving by covering losses on property transactions was subject to tax as a profit of the employment; Jenkins LJ in giving one of the majority judgments considered that it would not be a profit of the employment if the payment was made for a consideration other than services (see page 47 of the report). In my view, on this test, the payment was for a consideration that derived from Miss Minter's employment; it did not derive from her entering into a settlement agreement as distinct from her employment, as the settlement was a settlement of what should have been paid to her during her employment. It was therefore remuneration or a profit derived from her employment.
30. Mr Forsdick relied on the decision of Judge Wikeley in EM v London Borough of Waltham Forest [2009] UKUT 245 (AAC) for the contention that before the statutory provisions were considered, there had to be an initial categorisation of the payment as income or capital. The employee in that case was a part-time driver who had received lump sum payments as arrears for payments he should have received as a driver after the coming into force of the Part-time Workers (Prevention of Less Favourable Treatment) Regulations 2000 (SI 2000/1551). The Council contended that the payments should be brought into account as income for the purposes of the 1987 Housing Benefit Regulations. Judge Wikeley accepted Mr Forsdick's contention that the payment had to be classified as income or capital before the Regulations were applied. On that approach, the judge held that the payments should properly be classified as capital, as they were payments by way of a capital settlement for the resolution of a potential claim for breach of the regulations and not for breach of a contractual liability for payments due over a past period. The specific decision was made under the Part-time Workers (Prevention of Less Favourable Treatment) Regulations 2000. It is not necessary to decide whether the true characteristic of the payment under consideration in that case was compensation for past lost income nor whether there is a real distinction between that settlement and settlements such as those under consideration in the present appeal arising under the equal pay legislation. Nor is it easy to understand why once the true characteristic of the payment is identified, the only task of the decision maker is to consider whether it is income or capital within the meaning of the statutory scheme. In the case of the Housing Benefit Regulations, that task can be carried out in the way I have set out.

(iii) The payment to Miss Potter

31. My conclusion is the same in respect of the payment to Miss Potter under the Jobseeker's Allowance Regulations. It is not necessary to set out the reasons for that conclusion at any length, as the reasoning is the same as that in respect of the payment to Miss Minter under the Housing Benefit Regulations. The true characteristic of the payment to Miss Potter was that it was an on account payment for what was due to her by way of lost wages which had not been paid in the amount which should have been paid under the Equal Pay Act, the equality clause and similar statutory provisions. On its true characteristic, it was clearly compensation for past income. It was earnings within Regulation 98 and not excluded by the exception in Regulation 98(2) and therefore income under the Regulations. If not, it was earnings within Regulation 104 (4); again this was a point not raised before the Upper Tribunal, but the Regulation would apply for the same reasons as the identical provision in the Housing Benefit Regulations.

Conclusion

32. I would uphold the decisions of Judge Howell and Judge Jacobs and therefore dismiss both appeals.

Lord Justice Elias:

33. I agree.

Lady Justice Hallett:

34. I also agree.